Formal Sector

(i) Formal sector sources sources are banks and cooperatives.

(ii) The banks and cooperatives charge less rate of interest i.e., about 10 per cent per annum or so.

(iii) It results in more income and better condition of the borrower. There is improvements in his financial conditions.

(iv) Reserve Bank of India supervises the functioning of formal sources of loans.

Informal Sectors

(i) Informal sector sources are moneylenders, traders employers, relative and and friends.

(ii) Informal sector sources charges higher interest i.e., 3 to 5 per cent month.

(iii) Higher rate of interest of interest result in less income for the borrowers. It sometimes leads  to debt-trap.

(iv) There is no organisation which supervises the credit activities of the lenders in the informal sector. They do whatever is in their interest.